Introduction

In civil law jurisdictions it is generally thought that courts interpret law that pre-dates their decisions. In a decision rendered on 13 April 2018, the Court of Cassation decided to bring longstanding jurisprudence in line with recent legislation.

This decision related to a finance lease agreement for a truck; however, the court's decision would apply equally to other assets, including aircraft, helicopters and aircraft engines.

Facts

A company ordered a truck that was equipped with a crane from a supplier. The sales contract provided that the truck must have a minimum 850kg load capacity. In order to assist with the financing of its acquisition of the truck, the company entered into a finance lease agreement with a bank whereby the bank agreed to purchase the truck from the supplier and lease it to the company, with an option to purchase the truck once the lease term had expired.

However, following delivery of the truck to the company, it turned out that the truck did not have the required load capacity (and thus did not allow the usage that the company had expected).

The company took action against both the supplier and the bank and requested that the sales contract and the finance lease agreement be held null and void.

Decision

The Paris Court of Appeal held that both the sales contract and the finance lease agreement should be rescinded. The bank lodged a recourse against the court's decision in the Court of Cassation, which denied the bank's recourse and confirmed the Paris Court of Appeal's decision.

At stake before the Court of Cassation was the rescission's effect on the finance lease agreement – more specifically, the agreement's provisions that protected the bank from a defect in title or other event affecting the underlying sales contract and those that provided for indemnities in favour of the bank.

In the past, when a finance lease was terminated as a result of the nullity or termination of the sales contract, French courts had ruled that finance lease agreements should be terminated in accordance with its termination provisions (including those providing for full indemnification of the lessor).

However, in its decision rendered on 13 April 2018, the Court of Cassation changed its previous jurisprudence and aligned the legal regime of the finance lease agreement with that of the operating lease in case of defect affecting the validity of the underlying sales contract. The court ruled that, where a sales contract and a finance lease agreement are part of the same transaction, if the sales contract is rescinded, the finance lease agreement is automatically void on the date of such rescission.

The issue for the bank is that if an agreement is rescinded it is deemed never to have existed and no party can enforce any of its provisions against the other. The bank or lessor can thus no longer enforce the indemnity provisions of the void finance lease agreement.

Interestingly, in doing so the Court of Cassation brings its jurisprudence on the matter in line with a recent change to the Civil Code. Indeed, Article 1186 (that was added in 2016) of the Civil Code provides that:

Where the performance of several contracts is required to carry out a single transaction and one of them becomes void, the other contracts whose performance has become impossible and those for which the performance of the void contract was a paramount condition, are void.

Accordingly, a finance lease agreement will be subject to this rule whether it was entered into before 2016 (in which case the above decision of the Court of Cassation will apply) or thereafter (in which case Article 1186 will govern).

Comment

There is much debate among French academics and practitioners as to whether provisions dealing with the consequences of the nullity of a contract survive the voiding of such contract. Some comfort may be found in Article 1230 of the Civil Code, which provides that the rescission of a contract does not affect the provisions that are intended to remain effective notwithstanding such rescission. Since rescission and nullity have the same effect, it could be argued that they should follow the same regime. However, Article 1230 was introduced in 2016 and an equivalent provision was not inserted in Article 1186 (which governs nullity).

Both provisions were introduced only recently and it will take several decisions of the Court of Cassation before a definitive view on the above discussion can be formed.

In the meantime, finance lessors must make sure that indemnity provisions are ring-fenced and protected from the voiding of the finance lease agreement if the underlying sales contract disappears.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.